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Monday, June 21, 2010

SAIL FPO: Comfortable Price, But Recent Performance Troubling

Nobody can doubt SAIL’s (BSE: 500113, NSE: SAIL) sales or production capacity that easily dwarfs private sector giant Tata Steel (BSE: 500470, NSE: TATASTEEL). Nor can anyone fail to be impressed by its 100% adequacy in captive iron ores. The only trouble spots are its high labour cost and the need to import 70% of its coking coal, that makes it less profitable than it should be. But with a new Chairman in place – the youngest ever in its history and brought in from outside – Steel Authority of India Ltd is tackling its challenges with a fresh vigour. By shifting more focus to value-added and speciality steels, and creating a new technology platform in alliance with global players like Posco (NYSE:PKX) and ArcelorMittal (NYSE:MT) to use the domestically available non-coking coal, Steel Authority seems to be right on track. It is leveraging the newfound autonomy coming from the Maharatna status, as well as planning to power its expansion through an FPO of around Rs. 16,000 crore, at least half of which will be equity expansion. But investors will be weighing the peculiarity of last two years' financial performance - with profits dipping for the first time in 2008-09 and sales dipping for the first time in 2009-10, ever since the decisive turnaround that started in 2006. However, with a comfortable price-to-earnings of around 12, and trading at only 2.5X the book, the SAIL scrip is not severely overpriced, taking into account the capex ahead.